28. Memorandum From Secretary of Defense McNamara to President Kennedy0

Washington,
July 16,
1963.

SUBJECT

Reduction in Department of Defense Expenditures Entering the
International Balance of Payments

This is in reply to your Memorandum for the Cabinet Committee on Balance
of Payments, dated April 20, 1963,1 which requested, in
part, that after consultation with the State Department, I recommend
specific actions, capable of completion by the end of Calendar Year
1964, which would achieve a gross reduction in the annual rate of
Department of Defense expenditures abroad of between $300-400 million
below the FY 1963 level.

Department of Defense Expenditures
Overseas

In the absence of action along the lines recommended and discussed below,
Department of Defense expenditures entering the international balance of
payments during FY’s 1963-66 are
estimated as follows:

($ Millions)

FY 1963

$2,739

FY 1964

2,686

FY 1965

2,700

FY 1966

2,698

These estimates are based on the currently planned deployment of our
military forces and the continuation of all current Department of
Defense programs designed to reduce expenditures overseas. They also
reflect a moderate increase in price and wage levels overseas
anticipated for this time period.

As you know, I have made a concerted effort during the past two years to
reduce the net adverse balance of Department of Defense transactions
entering the international balance of payments. During the period FY 1961-63, the net Department of Defense
adverse balance, i.e., gross expenditures overseas less receipts, was
reduced by approximately $850 million—from $2,334 million to $1,477
million. This reduction was achieved by holding our expenditures
relatively constant despite increased [Page 69]international tension and inflation abroad, and by
increasing receipts.

With respect to these greater receipts, Germany and Italy have agreed to
offset all or part of our defense expenditures in these countries by
increased spending for U.S. military goods and services. Our efforts to
increase sales of U.S. military equipment to other allied countries will
continue to be pressed. However, we believe that the $1 billion of
annual receipts projected for the period FY 1964-66 are a realistic maximum.

Guidelines for Developing the Actions
Proposed Herein

Further actions to reduce Department of Defense expenditures overseas, as
outlined in Attachment A,2
are based on the following:

1.

U.S. commitments of effective military forces will continue to
be met.

2.

A gradually increasing capability of the Armed Forces to
deploy rapidly will permit some reduction in other forces
permanently in-place overseas.

3.

Our increased strategic missile capability will permit, by the
middle of CY 1964, somewhat less
reliance on overseas based manned bombers.

Summary of Recommended
Actions

The actions affecting our present deployments in Europe are:

1.

The consolidation on four bases and some reduction (from 103
aircraft to 80) in our present B-47 Reflex posture by July 1,
1964.

2.

The transfer of the aircraft of two U.S. air defense squadrons in
Spain to the Spanish Government by January 1, 1965.

3.

The return of the F-102 air defense squadron from Iceland by July
1, 1964 (subject to the concurrence of Iceland’s government).

4.

The use of increased MATS capabilities to permit the return of 32
C-130 aircraft from France by April 1, 1964.

5.

A reduction in the Army Line of Communications (LOC) in Europe
predicated on some reductions in theater reserve stocks, relocation
of issue stocks and placing in standby status certain facilities in
Western France.

In the Pacific, the more important
redeployment actions recommended are:

1.

The elimination of the obsolescent B-57 wing in Japan 6 months
earlier than programmed (i.e., July 1, 1964). The 12th Tactical
Fighter Wing (F-4C aircraft) now programmed to deploy to Japan
upon the phase out of the B-57 wing would be retained in the
U.S. to increase our capability to respond to contingencies
elsewhere in the world.

2.

The return to the U.S. of 16 C-124 transports from Japan and
16 C-130 transports from Okinawa by October 1, 1964, using our
increased airlift capabilities to meet much of the Pacific
logistics requirements, reduced by the redeployments.

3.

The return to the U.S. from Japan of the 66 F-102 aircraft (20
of which are presently programmed to be removed by July 1,
1964). Such a move is made possible by utilizing in the air
defense of Japan the increased capabilities of the Japanese Air
Self Defense Force, and the increased capabilities of the USAF
to rapidly deploy F-4C aircraft to Japan during the periods of
tension or at the outset of hostilities for air defense
missions.

In addition, I recommend a series of actions which would produce foreign
exchange savings in such areas as contractual services, petroleum
procurement and construction. We also anticipate that savings will be
achieved through better personnel management. All of these actions are
discussed in greater detail in Attachment A.

Effect of Recommended Actions

My recommended actions would achieve in CY
1965 and FY 1966 a reduction in overseas
expenditures of approximately $300 million below the FY 1963 level as follows:

Although the redeployments of Air Force units reduce our forward deployed
forces, they would have a desirable effect on our capabilities to
respond to contingencies anywhere in the world. A smaller portion of our
forces would be engaged in substituting for allied self-defense forces,
more would be available for concentrated use as conditions may dictate,
and a smaller number would be deployed on the more vulnerable forward
bases.

The actions relating to Japan go beyond the specific recommendation
contained in Mr. Gilpatric’s
memorandum to you of February 8, 1963 relating to U.S./Japanese Defense
Relationships.4 They
involve a considerable withdrawal of aircraft from Japan. However, they
are militarily [Page 71]desirable, apart
from gold flow considerations, in the sense that they increase our
reaction capability elsewhere. In addition, they emphasize for the
Japanese our belief that Japan must depend more on its own self-defense
capabilities in the future. In this connection I have been disappointed
by the current level of Japan’s defense expenditures.

I believe the minor adjustments of Army strength in Europe are desirable,
gold flow considerations notwithstanding, in the interests of better
organization and management of our resources. This applies particularly
to the reorganization and streamlining of the Army Line of
Communications (LOC) in France. However, the Joint Chiefs of Staff
state:

"The reduction in the Army LOC in Europe could have an adverse
impact on the Army combat capability. Three areas of principal
concern are the ability of the Army to respond quickly to an
emergency in Europe after the cuts are made, the concentration
of stocks in the forward area, and the extremely important
politico-military implications of placing a part of the LOC in
Western France on standby and reducing war reserve levels to 90
days. I believe this adverse impact can be minimized by
cooperative logistics agreements in the form of joint depot
utilization in Western France, by maintaining a capability in
CONUS and Europe for rapid expansion in an emergency and by
insuring that adequate airlift and sealift are available for a
rapid reconstitution of the LOC.”

The possible termination of the Caribou program in Canada has been under
review for some time. The FY 1963
procurement was undertaken in part to retain the option of using that
aircraft if no more desirable alternative developed in the future while
at the same time permitting some continued improvement in Army
capability. Continuing study of this matter has led to the conclusion
that the 157 Caribou on hand and on order as of June 30, 1963 will be
adequate to meet our requirements in view of the availability of
C-130E’s.

During your meeting with Prime Minister Pearson on 10-11 May 1963, you
indicated that we were then reviewing our requirement for the Caribou.
You will, of course, remember that we are committed to consult with the
Canadian Government before any termination notice is announced. When I
met on June 6 with Mr. Drury, the Canadian Minister of Defense
Production, I told him that Caribou would have to compete on its own
merits against other alternative solutions to the Army’s air transport
problem. Thus, termination of Caribou procurement will not surprise the
Canadian Government even though it will undoubtedly be
disappointing.

I have consulted with the Joint Chiefs of Staff with regard to the
military acceptability of the foregoing measures. While recognizing the
compelling economic issues inherent in the current balance of payments
problem, they point out that “most of the measures designed to control
gold outflow work against the military desideratum of maintaining a [Page 72]forward strategic posture based
upon the deployment of substantial military forces in sensitive
strategic areas overseas. The actions recommended in this memorandum
which entail bringing home Air Force units will, in varying degrees,
increase the reaction time of our military response, particularly in the
areas of the Western Pacific. The proposed reduction in the B-47 forces
overseas [a reduction of 23 aircraft for a period of a few months]5 will
occasion a readjustment of strategic nuclear targeting and, for a
limited time, will reduce the weight of our nuclear attack. Also, the
Joint Chiefs of Staff have expressed concern over the effect on base
rights in Iceland, Spain, and Japan of a reduction of U.S. garrisons
there unless such reductions are preceded by careful bilateral
negotiations. However, if the contribution of these actions to the
solution of the balance of payments problem is considered to outweigh
the military risk involved, then the Joint Chiefs of Staff accept the
proposals.”

Consideration of Additional
Actions

In arriving at these recommendations I have considered a number of other
alternatives. These actions included possible redeployments of
additional U.S. forces now in Europe and the Pacific, changes in
depend-ents policies, early termination of the SAC Reflex posture in
Europe, and a further reduction in overseas petroleum procurement. In
the course of preliminary discussions, the Department of State expressed
concern over the possible adverse political and economic repercussions
of substantial redeployments or a significant curtailment of petroleum
procurement overseas.

To cite one example of these political constraints, we estimated earlier
this year that approximately $20 million of our FY 1964 requirement for aviation gasoline normally procured
in the Caribbean area could have been returned to the U.S. by
restricting bids to U.S. sources. The added cost of this action would
have been only $322,000. When weighed against the fact that other
procurements for use overseas are being returned to the U.S. at premium
differentials up to 50%, this proposal was very attractive from the
budgetary standpoint, and was militarily sound. However, in view of the
State Department objections, the procurement of the first half of our
FY 1964 requirement was not
restricted to U.S. sources.

In addition to the actions recommended herein, I am investigating the
following areas which may result in additional savings over those now
projected:

1.

A review of personnel requirements for DOD communications activities overseas. My
preliminary review indicates that some reductions in this area
may be desirable.

2.

A review of overseas headquarters with a view to streamlining
and/or consolidating them.

3.

A joint review with the State Department of our over-all force
posture in Korea.

4.

A review of the Air Force tactical maintenance concept with a
view to establishing such maintenance in rearward areas, thus
increasing our capabilities for non-nuclear conflict while
reducing overseas costs.

5.

A review of the possible redeployment of the 1st Marine
Aircraft Wing from Japan to Okinawa and a review of the
redeployment of the F-105 TFW from Kadena, Okinawa, to
Guam.

6.

A review of certain of our forces committed to NATO and deployed overseas,
keeping in mind the possibility of redeploying some forces to
the United States and in turn demonstrating frequently our
ability to deploy to Europe in support of NATO commitments.

Other Possible Savings

I believe that savings of any substantial magnitude over those herein
recommended or being reviewed could be accomplished at this time only
through: (1) substantial redeployments to the U.S. or other dollar
areas, and/or (2) significant reductions in the dependents authorized
overseas.

Recommendation

I recommend your approval of the actions proposed in Attachment A.

I have discussed these actions with Secretary Rusk and he concurs in them, subject to review of the
detailed plans for their implementation. Secretary Rusk stresses the necessity for a
carefully coordinated information and consultation procedure to ensure
that:

1.

These actions not be presented as a “package” implying U.S.
withdrawal from its commitment to maintain the integrity and
freedom of the Free World.

2.

The specific countries involved in the proposed redeployments
understand our reasons and be given no basis for believing that
the program is forced upon us by our balance of payments
position.